Both in Europe and the UK, concerns have been raised over increasing evidence of poor conduct and risks to investor protection from retail contracts for differences (CfDs) and binary options. In addition, there has been an increase in the number of firms operating in the CfD market, often selling through online platforms, prompting concerns that retail customers trading CfD products do not have an adequate understanding of these products.

Regulatory Response

Following a consultation in January 2018, ESMA has decided to use its product intervention powers under MiFIR to address these investor protection risks.  It has agreed the following measures:

  1. To prohibit the marketing, distribution and sale of binary options to retail clients.
  2. To restrict the marketing, distribution or sale of CfDs to retail clients, including rolling spot forex and financial spread bets.

The restrictions applied to CfDs are:

  • leverage limits on the opening of a position between 30:1 and 2:1, depending on the price volatility of the underlying asset;
  • a 50% margin close out rule applied on a per account basis;
  • negative balance protection, limiting retail clients’ liability to the funds in their CFD trading account;
  • a prohibition on firms offering monetary and non-monetary benefits (excluding research and information tools) to retail investors; and
  • a standardised risk warning, including firm-specific figures on the percentage of client accounts that have lost money trading CFDs.

Following publication in the Official Journal, firms will be required to implement the prohibition on binary options within one month, and the restrictions on CfDs within two months.  The measures will initially apply for three months after which they may be renewed.  The FCA supports ESMA’s approach and expects to consult on whether the measures will become permanent.

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